Google Moves to Keep Its Lead as Web Goes Mobile

Miguel Helft|The New York Times

Tuesday, 5 Jan 2010 | 9:48 AM ETThe New York Times

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Google’s expected unveiling on Tuesday of a rival to the iPhone is part of its careful plan to try to do what few other technology companies have done before: retain its leadership as computing shifts from one generation to the next.

The rapid emergence of the smartphone as a versatile computing device may be as much a challenge as an opportunity for Google , which built its multibillion-dollar empire largely on the sale of small text ads linked to search queries typed on PCs.

Photo: Cory O'Brien

Leaked Image taken of Nexus One by Google.

As people increasingly rely on powerful mobile phones instead of PCs to access the Web, their surfing habits are bound to change. What’s more, online advertising could lose its role as the Web’s primary economic engine, putting Google’s leadership role into question.

“The new paradigm is mobile computing and mobility,” said David B. Yoffie, a professor at the Harvard Business School. “That has the potential to change the economics of the Internet business and to redistribute profits yet again.”

In recent decades, the power of industry giants like I.B.M. and Microsoft, which once seemed unassailable, waned as computing shifted from big mainframes to PCs, and from PCs to the Internet. Many analysts say it is now Google that is faced with a less certain future in the face of another shift.

Still, they say Google saw this coming years ago and has been preparing for it. Google executives now say they are confident that the company will thrive as the mobile Internet grows.

“We are incredibly excited about the opportunities that we see in mobile,” Vic Gundotra, a vice president of engineering at Google who oversees mobile applications, said in an interview on Monday. “We have invested a considerable amount, and we can now really provide a compelling mobile experience.”

Top Google executives, including Eric E. Schmidt, the chief executive, have long said that the mobile Internet was Google’s biggest opportunity for new growth. They orchestrated a string of acquisitions of companies with mobile-related technology, including Android, maker of a cellphone operating system; GrandCentral, a service for making calls that can bypass telephone lines; and AdMob, an advertising network for mobile applications. The AdMob deal is awaiting approval from regulators.

Google also invested far more aggressively than its competitors in mapping technologies and services tied to a user’s location, which are likely to become the vital underpinnings of new advertising systems on GPS-equipped mobile phones. Last month, Google came close to paying more than $500 million to acquire Yelp, a Web site for business listings and reviews. While the deal collapsed at the last minute, Google’s interest underscored its determination to become a force in mobile advertising.

And in recent years, Google has worked systematically to loosen the hold that other companies have on the mobile industry.

In 2008, for example, Google bid $4.7 billion in a government auction of the nation’s airwaves. While Google had no intention of winning, it bid to ensure that the airwaves would be subject to so-called openness requirements, meaning that Verizon Wireless, which won the bidding, would not be able to exclude Google services like Web search, Gmail and maps from phones using those frequencies.

The expected unveiling on Tuesday of the Nexus One, a thin, touch-screen handset built to Google’s specifications and made by the Taiwanese company HTC, is a challenge to a newly minted industry power: Apple, whose iPhone dominates the high end of the smartphone market. While the iPhone sends millions of people to Google’s search and other services, some of the company’s applications, like Google Voice, have not been allowed to run on the phone.

Analysts say that with the Nexus One, which Google plans to sell to consumers directly, the company is trying to free itself from Apple’s growing influence. It also wants to broaden the appeal of Android’s technology. The phone is expected to be sold unlocked, allowing consumers to buy service plans separately.

Mr. Gundotra declined to discuss specifics of the Nexus One. But he said all of Google’s mobile moves were driven by one objective: pushing the industry to open up in an attempt to replicate on mobile phones the environment that has allowed the PC-driven Web to grow at explosive rates.

“Before the mobile Web really started to take off, there were many barriers to consumers,” he said. “Sometimes it was limited choice about what you could do with your phone,” he said, adding that in some cases, it could take as many as 19 clicks for a user to get to Google’s site.

Some of Google’s moves, like its bid for spectrum, confounded many in the industry. But analysts say that Google’s actions proved shrewd and that the company has, to a large extent, helped open up the mobile Web and ensure that its own services, and its ads, will be accessible to all.

Google: "Very encouraging"

“You could take a view that this is a very geeky company,” said Nicholas Carr, author of “The Big Switch,” a book about the shift to Internet computing. “That underestimates the strategy that underlies all these moves.”

Some analysts say that with the early success of the Android operating system, which is built into phones from several manufacturers, Google is already beating Microsoft, its biggest rival, in the mobile business. And they note that mobile phone software is tethered to the Web more than PC programs, playing to Google’s strengths in Internet computing.

Indeed, Google has moved so aggressively to establish itself as a force in the mobile Web that it has already attracted government scrutiny. The Federal Trade Commission recently stepped up its review of Google’s proposed $750 million acquisition of AdMob, as some advocacy groups are raising alarms that the deal could extend Google’s dominance of online advertising into mobile phones.

Yet some questions remain unanswered: Will advertising remain central to the Web economy as consumers shift to mobile phones from PCs? And will applications change people’s reliance on search engines?

Google’s text ads are sold through an auction system, and analysts say that some of its most lucrative ads show up during intensive online research tasks, like finding a vacation rental or securing a good rate on a mortgage. Those are more likely to be conducted on a PC than on a cellphone.

“It certainly remains to be seen how big mobile advertising will be,” said Charles Golvin, an analyst with Forrester Research.

Predictions about the growth potential of mobile advertising vary widely. A recent report on the mobile Internet by Morgan Stanley, for instance, said that while advertising accounts for 40 percent of revenue on the desktop Internet, it accounts for just 5 percent of revenue on the mobile Internet. That could change, as more personalized advertising technologies, including coupons and offers that are aimed at users based on their location, could usher in a new wave of growth in digital marketing.

At the same time, some surveys show that users are wary of ads that could clutter the precious real estate on their small cellphone screens. And phone users seem more willing to pay a few dollars for applications or content than PC users, potentially reducing the importance of advertising.

Another risk for Google is that popular smartphone apps could erode the power of its search engine. In a recent note to investors, Ben Schachter, an analyst with Broadpoint AmTech, wrote that apps could eat into search revenue by giving users direct access to many commercial Web sites.

“When you go to Google and search for a product or for Amazon, that’s a way for Google to make money,” Mr. Schachter said. “But if you have the Amazon or the eBay app on your mobile phone home screen, you are more likely to click on that button and buy something without ever using Google.”

Mr. Gundotra dismissed those concerns. While he refused to provide specifics about Google’s mobile revenue, he said that its rate of growth mirrored the company’s results when it began selling ads on its Web site.